Yield Curve Flattens & GDP Estimate Falls To 1.9%

Investors were dismayed on Friday because 3 of the top banks beat earnings estimates, but stocks still fell. Then the Syrian airstrikes were announced which made some, such as myself, think stocks would fall again on Monday. However, stocks were able to rebound as the S&P 500 was up 0.81%. This led the S&P 500 to cross into positive territory for the year. The market continues to stay in the low end of its recent range. The biggest technical worry is a downtrend with lower highs forming. The all-time high was 2,873. The high in March was 2,787. To break that trend, S&P 500 would need to rally 109 points. Every sector was green on Monday as there was broad-based buying. Telecom did the best as it increased 1.48%. Financials underperformed as the sector was up 0.47% even though the big four banks all beat estimates.

Yield Curve Flattens

The 10-year bond had a reversal on Monday as it increased to 2.86% in the morning, but then closed flat at 2.83%. The 2-year yield didn’t reverse as sharply, so it was up 2 basis points to 2.38%. That means the curve flattened. The latest difference between the ten year and the two year is only 45 basis points. The long bond yield not increasing implies the bond market isn’t sold on great economic growth in 2018. The short end of the curve is seeing yields increase because the Fed is expected to raise rates 1-3 more times this year. The charts below compare the yield curve in various maturity dates with the Fed funds rate. The Fed funds rate crossing above the difference doesn’t signal anything. The curve flattening increases the odds for a 2019 recession, which are currently still pretty low.

NY Fed President Bill Dudley stated on Monday that the market understands more than 4 rate hikes in 2018 are unlikely. That’s true according to the CME website which shows the futures are pricing in a 5.3% chance of more than 4 hikes. In the past few days, the chance of at least 4 hikes increased as it’s now at 39%. The higher that percentage increases, the more the yield curve will flatten. If the Fed hikes 3 times, it could steepen.